General liability rates drop as capital moves to casualty

General liability insurance prices are still falling for U.S. buyers with favorable loss histories as they continue to benefit from a capacity surplus.

Rates have generally fallen 5% to 10% for both primary and excess general liability coverage, extending the declines of recent years amid increased competition among insurers, brokers say. Larger rate declines of 15% to 25% also are not unusual as insurers aggressively seek to renew business, they say.

"It's still a softening market," said Daniel Aronson, managing director of Marsh Inc.'s casualty practice in New York. "There's plenty of capacity. People are very hungry for new business. Because they're so afraid of competition, they're doing what they can to hold on to business."

Underwriters, though, are not sacrificing profit to maintain or grow their customer base, market observers say.

"I certainly have not seen any irrational or reckless behavior," said Don Pickens, Boston-based Liberty Mutual Group Inc.'s chief underwriting officer for national markets.

"They're still going to write for underwriting profit," said Reed Wykes, director of risk management for Houston-based Parker Drilling Co., which provides drilling equipment and services worldwide to energy companies.

Debra Weiser, senior vp, field executive for Travelers Excess Casualty in New York, said: "Our hope is all of our very smart competitors maintain their pricing discipline."

Fueling the pricing weakness is the capacity surge generally driven by established insurers, some of which are redeploying capital from the risky property markets to the casualty markets, brokers and insurers say.

In addition, the insurance industry has rebounded from the negative impact on its profitability from substantial hurricane losses in 2004 and 2005, leading to a market correction, Mr. Wykes said. "There's enough capital in the market," he said.

The pricing declines, though, are reserved for companies actively engaged in risk management with favorable claims histories. Those with losses or in difficult risk categories are experiencing flat or higher renewals, brokers and insurers say.

"If you have a bad loss history, you can't expect these types of reductions," said Paul Smith, executive vp and casualty practice leader for Willis North America in New York.

Because capacity is so plentiful in the general liability market, even certain industry classes that are generally difficult to place, such as construction or pharmaceuticals, can secure coverage, Ms. Weiser said. "I can't think of a class that's impossible to place," she said.

Despite increased competition, insurers generally have been able to renew their business as customers seek stability with highly rated companies rather than simply following the largest rate reductions, brokers and insurers say.

"That's what allows risk managers to sleep at night--to know that someone is going to be around to pay the claim when they have it," Ms. Weiser said.

Despite the generally soft market, retention and deductible levels are stable, although insurers say they are monitoring those levels for any movement toward lower retentions and deductibles that may be more favorable for buyers from a financial standpoint.

Risk managers, though, often build an infrastructure around maintaining a certain level of risk and prefer to keep the risk rather than transferring it and have insurers making decisions for them, observers say.

"Customers are continuing to want to participate in losses," Liberty Mutual's Mr. Pickens said. "They're looking at how much liability they can retain in-house."

General liability primary customers are becoming more engaged in working through the claims process with third-party administrators and insurers, Mr. Pickens said. "They want a more active role in how losses are managed, which is probably a good thing for all parties to be engaged."

Terms and conditions, meanwhile, have been relatively unaffected. "It's pretty much business as usual on terms and conditions," Mr. Smith said. "The changes are really within the rate structures."

While buyers are not yet purchasing higher limits due to the pricing weakness, that could become a possibility if large buyers decide to deploy the savings they are experiencing toward additional limits in their general liability coverage, said Denise Morris, senior vp, excess casualty for Liberty Mutual in San Francisco.

Going forward, tort reform remains a key fundamental issue for the casualty markets, although it is still too early to see how reform efforts on both the state and federal level will pan out eventually, observers say.

The "tort liability environment in general is one you have to absolutely keep an eye on," Mr. Pickens said.

In addition, developments related to extending the federal terrorism insurance backstop must be monitored, he said. While failure to renew the backstop would have little impact on general liability insurance pricing, it could affect terms and conditions as insurers may seek to introduce policy exclusions on classes that might be susceptible to terrorist events, Mr. Pickens said.

Barring major events, though, further rate declines are likely, Mr. Wykes said.

"I would say it will continue for the next six months, all things being equal," Mr. Wykes said. "I don't see any increase on the horizon without something catastrophic happening. If you don't see a big hurricane season, you could see some further softening next year."